More on Asia and Decoupling

About a year ago, when US and Europe were down, Asia had rebounded and many people were saying that it was a sign Asia had successfully decoupled itself, I cautioned against such a view in a post “Have We Arrived?”

Just about a month ago, China reported that its growth has slumped to a three-year low of 7.6 percent in the second quarter and one main reason was the continuing bad news coming out from Europe amid a slow US recovery. If my argument then was not convincing enough, surely the arrival of these statistics would add substance to it now. It is however not the intention of this post to do just that. Rather, I would like to speculate on why the data a year ago would have misled many people into thinking that Asia had decoupled from the West when it didn’t.

Central to my speculation is the concept of expectations. Few people in China would have expected the crisis in US and Europe to drag for so long considering all the actions taken by the respective governments. They had continued to produce and stockpile their products ready to be exported when the West demanded them. This act of production and stockpiling could have contributed to the rebound observed a year ago. Obviously, this expected demand never materialized. Since the existing stock had not been cleared, there was no need for new production and hence the observed current slowdown.

If domestic consumption had increased substantially over the same period, it would have cleared at least some of the existing stock but this was not the case. Apparently, domestic consumption either remained stagnant or did not increase sufficiently to replace the demand from the West. In fact, if manufacturers were to factor in expected increase in domestic consumption into their production decision a year ago, their existing uncleared stock would have been even higher than if they did not do so. In other words, both the expected increase in demand from the West plus domestic consumption that never materialized has resulted in the current slowdown.

Right about now, people who disagree with this speculation would say that it depends on which part of Asia you are looking at and would point to an Asian country further south of China to make their point: Indonesia. Growth of domestic consumption in Indonesia has been phenomenal, an excellent example of one way a country could decouple itself from the West. Perhaps, China could learn a thing or two from Indonesia about boosting domestic consumption. Is it?

Well, I would again warn against jumping straight to an unsubstantiated conclusion. Indonesia tomorrow could be China today. Indonesia as part of Factory Asia is a supplier of parts and components to China, the final assembler. The current increase in domestic consumption could have been driven by expectations that China will continue to demand parts and components, which is highly unlikely if recent statistics can serve as reliable indicators of how things will evolve.

Growth With Redistribution

I read a book on UN ideas recently and one idea that caught my eye is “growth with redistribution.” I think it is an appropriate idea in light of current instability and push towards a more sustainable growth. The book has it that if we are to continue with the current system of growth where everyone is pretty much doing things for themselves, no doubt the rich will continue to experience impressive growth in the size of their wealth, but the poor also has to reach a certain minimum level of growth in their wealth or earnings in order for them to be able to afford their basic needs.

This inter-connectedness between the rich and the poor can be explained by their demands for goods and services. The fact that much of the world now run on market economy means that prices of goods and service will adjust based on demands and supplies. The rich with their wealth will surely be willing to pay more for a certain good and if many of them do so, it will push the price of the good up if supply is limited. If the poor also demand the same good, then there would be a chance whereby the poor may not be able to obtain this good. And if the good turns out to be a basic necessity, then you have a situation whereby the poor cannot afford their basic needs.

Is this really true? Well, surely you have read about the increasing food and fuel prices lately. In some cases, governments indeed step in to subsidize these goods for the poor but is this sufficient? Perhaps not and with fiscal austerity in their minds, how long will this last?

The concept of “growth with redistribution” is about meeting basic needs for everyone. The rich with their resources can certainly grow more but with basic needs in mind, they perhaps do not need to grow their wealth at the current rate. The poor need to grow their wealth but with redistribution from the rich in mind, they perhaps do not need to slog so hard to the point that it affects their health. It is all about not overspending and using excesses for the benefits if those who are lacking.

It is a beautiful idea in an utopian society and certainly is worth trying in our society but in such a “real” society, is this another idea that is destined for the bookshelves?

Empty Seats in The 2012 London Olympics

The 2012 London Olympics started with much fanfare last week. But as the cameras rolled through the competition venues, many picked up something unexpected: empty seats for matches that were supposed to be sold-out. Why is this so? Jeremy Hunt, UK Minister of Culture, had mentioned that an investigation would be carried out. The outcome will probably not appear anytime soon but below could be some of the potential reasons:

1)    The system may not have been right when it indicates that a match is a sold-out one and it is not surprising considering that ticket allocations were done via some complex mechanisms.

2)    Many of the original buyers could have been people who hoped to make quick bucks and are unfortunately unable to find buyers.

3)    Everything is working fine but the hiccups with security, immigration, etc have scared the spectators away.

Drainage Oil From Another Perspective

The case of drainage oil from China maybe old news for some readers but it is a new one for me, having heard about it from a friend last week. I think that it is a case worth mentioning if we are to consider that China’s food industry continues to draw flaks. However, I would like to end this post with some thought-provoking statements.

For those of you who need a refresher or have never heard about this case, drainage oil is a term used to describe used cooking oil that is poured into the drainage. Rumor has it that some oil recyclers literally collect them from the drainage, process and then sell them back as recycled cooking oil.

According to the media, this is a serious problem in China but is it really true? Could it just have been a case that is blown out of proportion in light of the negative publicity surrounding China’s food industry? If this idea of recycling cooking oil from the drainage has been carried out in the developed countries, would it have been viewed negatively? Would it instead have been singled out as an innovative technique?

Will ASEAN Lose Out From The Trilateral FTA Between China, Japan and Korea?

Sometime ago, China, Japan and Korea finally agreed to kick-start talks that would lead to a Free Trade Agreement (FTA) between them. This move brings about two contrasting views. For the optimists, it shows that the 3 countries are finally ready to put behind their historical enmity in the name of economic growth. For the pessimists, particularly those that believe in ASEAN centrality, it is the beginning of the end of ASEAN’s role in providing neutral ground for the 3 countries to negotiate and engage one another, especially if bilateral communications on some matters are close to impossible.

On the economic front, the pessimists fear that the expanded market size of this FTA would reduce ASEAN’s competitiveness when it comes into being. I would like to argue the opposite. China is such a huge market that it does not really need to add Japan and Korea’s population to its investment attraction strategies in order to attract more investments. In other words, firms that find China as a prospective investment location would not have waited until now before making their moves. They would have done so long time ago. There is certainly a value for Japan and Korea use the expanded market size to attract more investments but given the high labor costs in both countries, I doubt expanded market size is a strong pull factor by itself.

Then, there are those who said that ASEAN may be left out of the East Asian fortress since the FTA does not involve them. But this is an unlikely event since ASEAN has arguably pre-empt this by having FTA with each of them. I will also argue that the regional production networks that have been developed and nurtured over the years is not something that can be altered overnight, more so if there is no basis to do so at all.

Last but not least, the talk is only about to start and most definitely has not yielded anything tangible. For all the commotion, it may end up being another FTA that is trade-light and more driven by politics rather than economics.

Is Plurilateral the Way Forward?

Many trade experts have suggested ways to move forward following the deadlock in the Doha Round. Chiefly among them is for smaller groups of countries to negotiate and implement policies that they can then extend to other WTO members as and when they are ready. The simple argument behind this proposal is that agreement can be reached faster and easier among smaller number of negotiating countries. The question is: can multilateralization really be achieved at faster rate via this proposal, as is suggested, or is it going to further burden the already complex environment? In other words, is this a building or stumbling block?

Let me give a negative perspective of this proposal. When countries negotiate, they do so from their own perspectives, taking into account their own interests. One can argue that although agreement can be reached more efficiently, the contents are probably narrower in a sense that it takes into account only the interests of the negotiating countries. If this agreement is to be eventually extended to other WTO members, will they take it at face value? Well, perhaps not since their interests have most likely not been included in the first place. When the time comes, these members will want to amend some parts of the agreement before they will subscribe to it. However, will the original negotiating countries agree since they will have to concede on some points.

Guarded Optimism for Post-Election Myanmar

The final tally of the by-election in Myanmar is out! The National League for Democracy (NLD) led by Aung San Suu Kyi won 43 out of the 44 seats that were contested. But is this the end by itself? Well, I would think of it as a step in the right direction but definitely not an end because a lot of uncertainties remain despite the historic event.

Firstly, while there is no doubt in her ability to inspire people, a lot of questions on Aung San Suu Kyi’s capabilities to run a country or rather contribute to the running of the country have been raised. This is not surprising considering that she is untested and spent a considerable time under house arrest.

Secondly, even if she is highly capable, critics have questioned her ability to influence key decisions made by the government since the NLD only holds approximately 5% of the parliamentary seats.

Thirdly, while President Thein Sein seems to be highly supportive of the political reform in Myanmar, there have been questions on how much influence he has over the Union Solidarity and Development Party (USDP) and how much power still resides with the military. There is always a possibility of a coup if he cannot convince them that he is right; Myanmar is afterall no stranger to coups.

Although the result of the by-election certainly deserves applause, the path ahead is far from smooth.